[VSA] Volume Spread Analysis Part II

[dandxg 10]

Hi Eiger great post, please don't apologize for the length, that's a benefit. More detail is better for learning. I have been really busy and haven't had time to post but I will soon.

[dandxg 10]

Hi Eiger I was wondering if you could answer a question please. When you look at globex highs and lows do you only make note of them on days when there is a significant report such a NFP is on Thursdays or do you look at them on days even where there is no pre-market reports? Good trading to all.

 

Dan

[Eiger 10]

When you look at globex highs and lows do you only make note of them on days when there is a significant report such a NFP is on Thursdays or do you look at them on days even where there is no pre-market reports?

Dan

 

Hi Dan,

 

I make note of them on all days. Many times, the market never gets to the overnight high or low, and that can be useful information in itself. I never know how the market is going to respond to a report--though I am always aware of when a report or potential news item is due--so I don't filter Globex levels by reports. However you determine S/R, the key idea is to know these levels in advance and then watch how price trades around them. VSA indications are excellent in this regard. The 19th illustrates trading around and through S/R levels pretty nicely, I think. It is a worthwhile day to study.

 

Eiger

[mister ed 10]

Thanks Eiger - really great stuff, so comprehensive.

 

Can I add one suggestion to anyone studying Eiger's work, if your charting software allows it use the 'replay' function to see how the price/volume activity unfolded in real-time (well a replay of real-time). I use the function on Investor R/T and find it a great review/learning tool.

[namstrader 10]

It is so informative for me with your analysis. It is amazing how a chart in the beginning of one's path reveals so little and with time and training, the depth of what is available on the chart for analysis, is far more than prior levels of development. From your sharing, Eiger, and others, it amazes me how little I knew about what a chart was saying from even several months ago.

[Eiger 10]

Mr Ed's idea of doing a bar replay is an excellent idea. It is one of the great tools we have available today that people like Tom Williams in the 1980s, Dave Mathys in the 1970s, George King in the 1960s, Bob Evans in the 1950s, and Richard Wyckoff in the 1910-30s didn't have. Although we stand on the shoulders of these giants, we can take advantage of the tools of our day and can advance the technique, even if only for ourselves. This is what Tom Williams has done in computerizing VSA, which was originally called "Wyckoff/VSA," now TradeGuider. Bar Replay is a terrific tool for learning VSA and for simulating "real time" analysis and decision-making. It is one of the tools I use all the time, even when just going over the past week just traded.

 

Eiger

[Eiger 10]

Sometimes a chart will jump out at you - not so much for making a trade, but for the lessons it has to teach. Each night I annotate the day's chart, print it out, and keep it in a notebook. I review these from time to time, and that is a helpful thing to do. But, some charts have a lot to teach. I put these into a separate file for more focused review and study.

 

A while ago and on a different forum, Sebastian posted a chart without annotation, he just marked where important VSA indications took place. I had been studying his charts for a while. In this chart, he suggested those following his nightly analyses try their hand at annotating the chart. I did, and it was at that point that I learned for myself that I understood VSA. It allowed me to go to the next level.

 

So, in that fine tradition here is a chart you can annotate. This is one of those charts that I put into a separate notebook because it has a lot to teach us as traders. Give this a shot and post your annotations, so we can discuss and learn. Be sure to draw tend lines and pay special attention to support & resistance.

 

It is not necessarily an easy chart, but I guarantee that if you put in a little effort, there are things you will take away that will serve you well in your future trading. Please try it.

 

The chart is the ES on a 5-minute time frame from February 20, 2008. It includes some of the relevant trading from the overnight session.

 

Have fun!

 

Eiger

[mike_ITL 10]

Dear Eiger,

 

can't thank you enough for your amazing analysis: didn't know how VSA ignorant I was before reading your post ... you gave us a condensed treasure, that's for sure!

 

I like how you mix VSA and Wyckoff, shakeouts and springs ... I will have to study Wyckoff now ;-)

 

Reading again and again your post it became all evident, but I guess it will be a challenge for me absorbing these concepts and applicating these in real time markets ... but I like challenges, so let's get seriously involved in this.

 

I have just one more question about the 19th: would you use bars in green circle to add to a long position ? If yes, wouldn't it constitute a poor risk/reward trade, as we have resistance not so far from S and T ?

 

Have a great day and thank you again for your effor in explaining VSA !

 

Mike

[dandxg 10]

Eiger, honestly I am weak at graphics on charts and don't know how to annotate yours. I just learned snag it, but I will give it a go if ok.

 

11. UT

AA. SC

BB and A. ND

B. Shakeout and I think a Wyckoff Spring?

C. UT

D. Test in a rising market

E. Not sure, but I think it's SOT? Doesn't appear to be VSA as I recall?

F. Another test

G. Another shakeout

H. UT

CC. I believe a test?

DD. Absorption volume or pushing up through supply

I. This one throws me off all the time. Not sure if it's buying climax or absorption volume?

J. Test

K. UT

L. Test, but supply is greater than it should be I believe?

M. UT

N. Shakeout but not sure?

CC. Buying climax

DD. SOT not sure, never taken original Wyckoff?

O. ND

P. Not sure?

Q. Looks like classic test, but with a possible buying climax in the background not sure I would want to do anything other than scalp that.

 

Sorry I can't annotate trend lines. If I were to use them, and they are one of my weaker spots for now, I would connect at least 2 lows and 1 high. So I would start with the high of AA to BB, after BB is formed, and definitely AA to B as we need a min of 2 hits in a uptrend. Thanks for making me rise to the challenge, it's good practice.

Edited June 23, 2008 by dandxg

[BlowFish 10]

Thanks for taking the time to put together the analysis last page. I hope you don't think me cheeky but have you considered putting together a short video commentary? I just figured that the amount of effort to annotate and add notes for all those bars it would be a fair deal easier to just talk about bars as you hover your cursor over them. A secondary benefit is they are easier to follow along as you don't need to flip back and forth between charts and notes. Anyway I don't want to appear ungrateful (I am certainly not!) but figure it might make things easier for you as you do produce quite a few of these excellent commentaries.

[Seb Manby 11]

 

It is not necessarily an easy chart, but I guarantee that if you put in a little effort, there are things you will take away that will serve you well in your future trading. Please try it.

 

The chart is the ES on a 5-minute time frame from February 20, 2008. It includes some of the relevant trading from the overnight session.

 

Have fun!

 

Eiger

 

http://www.videos.traderslaboratory.com/view_video.php?viewkey=33bc65bf8d78622277c4

 

Eiger;

 

There is nothing difficult about reading your chart, I have uploaded a video for you to view. I did not look at the date(20th feb), I thought it was from the 24th June.

 

I had an email from Gavin, look forward to meeting you in Aspen

 

best wishes

Sebastian

Edited June 25, 2008 by mister ed
re-input the link

[dandxg 10]

Thanks for taking the time to put together the analysis last page. I hope you don't think me cheeky but have you considered putting together a short video commentary? I just figured that the amount of effort to annotate and add notes for all those bars it would be a fair deal easier to just talk about bars as you hover your cursor over them. A secondary benefit is they are easier to follow along as you don't need to flip back and forth between charts and notes. Anyway I don't want to appear ungrateful (I am certainly not!) but figure it might make things easier for you as you do produce quite a few of these excellent commentaries.

 

Sure agreed. I just need to figure out how to do a video as I web cam and camstudio and camtasia. In the mean time I will check out Seebastians' which is much appreciated.

[dandxg 10]

traderslaboratory.com/view_video.php?viewkey=33bc65bf8d78622277c4

 

Eiger;

 

There is nothing difficult about reading your chart, I have uploaded a video for you to view. I did not look at the date(20th feb), I thought it was from the 24th June.

 

I had an email from Gavin, look forward to meeting you in Aspen

 

best wishes

Sebastian

 

Can you reposte Sebastian? The link doesn't work. Should I contact Gavin if interested in Aspen? I live in Denver and would be interested. It would be nice to meet some of face to face. Good trading to all.

[mister ed 10]

Can you reposte Sebastian? The link doesn't work. Should I contact Gavin if interested in Aspen? I live in Denver and would be interested. It would be nice to meet some of face to face. Good trading to all.

 

dandxg - try this link to the video:

 

http://www.videos.traderslaboratory.com/view_video.php?viewkey=33bc65bf8d78622277c4

 

Sebastian - I have updated the link in your post too.

[dandxg 10]

Thanks for the re-posted link. I was watching another Sebastian video and was offered the one I was looking for, very good! Wow, not sure I want to even try a video after Sebastian does one the mark is so high. And thanks very much Sebastian for taking the time to do it. All of your videos contain so much useful information.

[Seb Manby 11]

Hi Dandxg

 

I`m glad you like my videos. you should rate them for others.

 

Contact Gavin for Aspen.

 

Regards Seb

[Ricks Inn 10]

 

I`m glad you like my videos. you should rate them for others.

 

 

 

Regards Seb

 

 

 

 

Hi, Sebastian - Will video analysis like this be a part of the VSA Club? How's that coming along?

 

Best,

Rick

[dandxg 10]

Sebastian, hope the rating went through never did that before. Here is a chart I want to post that hopefully Eiger and yourself could respond to. This is one that really causes me confusion. Now mind you I didn't buy the test on this 3 min because, thanks to you and Eiger I didn't first have a succesful test on a 15 min or higher time frame. I know it's FOMC announcement too.

 

Anyway at the right edge of the chart as Gavin like to say, it hard, IMO, to tell if this is absorption volume/pushing up through supply or a buying climax which this turn out to be. See how A is a high volume up close greater than the supply line and upthrust to the left? Then right after A we get a test, which fails, and then at the PDH, which is a S/R I use and works often, but no it turns out to be a BC and not absorption volume. Do every one else see the confusion on this or is it just me. No if like me you are contemplating buying a test on close you would have been stopped out very quick. What am I missing? This just seems like a toss up whether it's a BC or absorption volume many times and one doesn't know until minutes later. TIA

[Eiger 10]

Eiger;

 

There is nothing difficult about reading your chart, I have uploaded a video for you to view. I did not look at the date(20th feb), I thought it was from the 24th June.

 

I had an email from Gavin, look forward to meeting you in Aspen

 

best wishes

Sebastian

 

Hi Sebastian,

 

Great video analysis! You're right, I didn't expect you to do that -- it's better than I expected.

 

The date was was Feb 20th. I thought it was an interesting chart because of the pre-market news (CPI & Housing Starts) being used to shake out the market and provide professionals with the opportunity to buy off the news for a later mark up. When you watch the response to the early AM news items from a VSA perspective, you can often see what the tone of the market will be for the rest of the day, as in this day.

 

I thought it was pretty interesting, too, that professionals kept it in a fairly tight range through the morning session, but the bottoms kept rising, and then pushed it up into the noon hour. The later girations around 2:00 were the FOMC meeting minutes being released. I suspect that they used this news and the subsequnt rally to unload what they had accumulated earlier in the day. Bookends of news for accumulation and distribution.

 

Brilliant analysis, as always. I got a lot out of it

 

I'll be talking with Gavin next week. We'll see how it goes. It would be great to meet you in the fall.

[Eiger 10]

Anyway at the right edge of the chart as Gavin like to say, it hard, IMO, to tell if this is absorption volume/pushing up through supply or a buying climax which this turn out to be. See how A is a high volume up close greater than the supply line and upthrust to the left? Then right after A we get a test, which fails, and then at the PDH, which is a S/R I use and works often, but no it turns out to be a BC and not absorption volume. Do every one else see the confusion on this or is it just me. No if like me you are contemplating buying a test on close you would have been stopped out very quick. What am I missing? This just seems like a toss up whether it's a BC or absorption volume many times and one doesn't know until minutes later. TIA

 

Hi Dan,

 

I'll give you what I can on this ...

 

Tom Williams always talks about the importance of background. Things in the market, like in life, do not happen out of context. I made a few posts recently about being aware of support and resistance. This is part of the background, either in terms of horizontal areas of S/R, trend channels, pivots, etc. The eRussell is not a market I trade, but the principles all hold across the markets. Let's first look at the background as it evolved on the 15-minute chart (first chart).

 

You've heard the adage, 'support becomes resistance.' This chart shows it pretty well. Support along the 719 level that first came into the market on 20 June became resistance on yesterday and again today. You can see that pretty good volume came in just before noon on the 24th and again this morning. Price was rejected at the 719 level both times, showing supply was dominate at that level. Just before the bar you asked about as the FOMC made it's announcement, volume again came in high at the 719 level and once again price was rejected (at 1). On the rally back up, there was No Demand at 2, confirming the supply we saw at 1 and all of the Ss. So, the background was dominated by supply.

 

I added a couple of old charts where price broke through an old top. In the first one from 3 April, you can see there was supply at D, which extended further to the left (not shown). From F, the market rallied. Notice the character of the rally. There is a stair-stepping, volume tends to expand on the rallies (F-G & H-I) and recedes on the reactions (G-H, I-J). Note that most of the bars on the rallies close above the previous bar's close. We make a new high at I, and the reaction to J holds at prior support (G). The reaction to J sees volume diminish and spreads tend to narrow. Very orderly and quite bullish. Note the push up above the supply areas at D & I. Several wide pread up bars, closing on their highs on good, but not excessive volume (compare to volume at D).

 

Here's another example from the other day, 19 June. Again a significant supply area (A-J-O-R). When the market reacts to S-T, it holds support. The reaction does not draw out supply (high volume). On the rally up and through the top of the trading range, the bars are orderly, wide spread, closing above one another and volume expands as price rises.

 

For one additional example, look at the 20 February chart posted earlier (not posted here) that you and Sebastian analyzed. (That was a nice analysis you did on that chart). Look at how support was held on the reactions, the character of te reactions, and the quality of the rally that broke through the resistance in terms of price spread, closes, and volume.

 

Now the 3-min chart. Right after the FOMC announcement very heavy volume came in over several bars, and price could not get above the 719 level - not a good sign. Instead, both volume and price expanded to the downside, indicating supply was in control. Note that price was unable to hold support that extended back to 9:45 or so. Instead, price pushed well through that support and makes a lower low. There was also a lot of churning with fairly wide price and high volume in the circled area. Comapre this area in terms of volume and spread with the other charts. Volume was still high on the reactions. The high volume area (red arrows around the 713-711 area) was never adequately tested. When price did go up and through resistance, it did so on ultra wide spread and the highest volume on the chart (excessive). It didn't push through resistance on several good demand bars with expanding volume like the other charts. It also didn't get very far above resistance before starting to react, again, compare to the other charts.

 

Sebastain has noted that when there is an important new announcement, a simple notion to think about is that when the market is taken lower during the day, the odds favor higher prices off the news, and vice versa.

 

Hope this is helpful.

 

Eiger

[dandxg 10]

Thanks much Eiger. I would respond more but my computer is being difficult. Oh the beauty of Microsoft.:o

[Eiger 10]

I got a question via PM from another trader who asked about tests in a recent chart. I thought the question was a good one, and a topic in which other traders might also be interested. Thus, I thought it was worth posting. Here is this trader's question:

 

... I have a question about the 2 N 's [as] tests. I am confused with your second N test. I don't understand how you identify the second N [as a] test and What it is trying to test ...

 

 

Here is the response:

 

... The Ns. Test bars always test supply in the background. In this chart, there is testing of the supply at D and at K. Even though both of those bars (D & K) closed well off their lows, the volume and also the wide spreads (especially on D, but also on K) showed very heavy activity. Much of that activity was supply. There had to be supply to generate that much volume and those wide spreads. Because the bars closed in the middle, we know that there was more buying than selling on those bars. Nevertheless, there was still supply. This is what is being tested by the N bars.

 

Tests are always down bars (i.e., close below the previous bar's close). Ideal Tests have narrow spreads (compared to recent bars), have volume less than the previous two bars, and close in the middle or the high. In this chart, the ideal Test is seen on bar P. Bar P is a down bar, narrow spread, close above the middle, and volume is less than the previous two bars.

 

We don't always get the ideal, unfortunately. The first N, for example, is a down bar, volume is less than the previous two bars, but the spread is rather wide. The close is also on the low, but the close is the least important feature of a Test. It is nice when the close occurs in the middle or high, but not an absolute requirement. Many excellent Tests (meeting all the other criteria) close on the low.

 

Although this first N is definitely a Test and shows supply is drying up, the spread is still rather wide. Spread relates to activity, so there was still a lot of activity on the bar, even though the volume was low, meaning that it is unclear whether or not supply has been fully mopped up. This is why the market was tested again at the second N.

 

The Second N is more conclusive, even though the volume is not quite less than the previous two bars. It is more conclusive because: 1) there is an uptrend occurring (higher lows, this is very bullish - always pay attention to a Test in an uptrend), 2) spread has narrowed, 3) volume is very low on a down bar into the area of D & K where high volume (supply) had occurred before. Even though this does not absolutely meet the criteria of volume less than the previous two, the bar is showing by its spread and low volume in the area of high volume of D & K while in an uptrend that supply had completely dried up. And, higher prices naturally commence after this bar.

 

Thanks for your question, ___; its a good one!

 

Hope this is helpful,

 

Eiger

 

P.S. To BlowFish. I am working on the videos

[tawe trader 10]

Tests are always down bars (i.e., close below the previous bar's close). Ideal Tests have narrow spreads (compared to recent bars), have volume less than the previous two bars, and close in the middle or the high.

 

Eiger,

 

Thanks for another very important and educational post.

 

Just to clarify things (if not for myself then for other novice VSA'ers), am I correct in assuming that a 'bullish' test is only seen as a positive test (ie signal to go long) AFTER the next bar closes up ?

 

Regards

Tawe

Edited June 27, 2008 by tawe trader
_

[jjthetrader 10]

Eiger,

 

Thanks for another very important and educational post.

 

Just to clarify things (if not for myself then other novice VSA'ers), am I correct in assuming that a 'bullish' test is only seen as a positive test (ie signal to go long) AFTER the next bar closes up ?

 

Regards

Tawe

 

Yes. There must always be a confirmation for this to be valid. If the next bar were down this would be a failed test.

 

If you wanted in early you could try and take a limit entry, after the high of that test bar is broken, somewhere within the range of the test bar. But this would not be how Tom teaches it. This would just be one way to trade it. As always, getting in before confirmation is much riskier. Better to wait for a worse price and have more confidence.

[firewalker 10]

Yes. There must always be a confirmation for this to be valid. If the next bar were down this would be a failed test.

 

If you wanted in early you could try and take a limit entry, after the high of that test bar is broken, somewhere within the range of the test bar. But this would not be how Tom teaches it. This would just be one way to trade it. As always, getting in before confirmation is much riskier. Better to wait for a worse price and have more confidence.

 

I'm not sure it is per definition riskier. It depends on how you define 'risk'. What if the test you observed happened on a 1 hour bar. Are you going to wait for the next bar to close? If so, you might enter when price has already made it's turn and presuming you want to put your stop below the low of the test, that might been a hell of a lot more risk as opposed to entering on the test itself and having a very tight stop.

 

I'm not criticizing your or someone else's approach. I'm just saying the 'risk' is determined not only by the probability of your trade, but also by the stop size and the position size you are trading. Each trader must find out what style suits him best, and whether he likes to wait for more confirmation (hence sacrificing the best entry) or enter aggressively with a tight stop, but -perhaps- a higher chance of getting stopped out.